The Disappearance Of 'The Hump' Is The Clearest Sign Yet That Markets Aren't Worried About The Debt Ceiling Anymore

One of the clearest signs yet that debt ceiling fears have faded
from the market is the recent shift in the yield curve for
short-term U.S. Treasury bills.

At this point, it looks like the Republican party has completely
backed down from the debt ceiling fight. Today they
offered a three-month extension of the ceiling in exchange for a
pledge from Senate Democrats to pass a budget – which they
haven't done in a while.

The chart below shows two 3-month T-bill curves. The curve plots
different maturities on the x-axis against yields on the
y-axis. One would expect a typical curve to slope
upward – as the future is uncertain, and the probability of
default sometime in the distant future is necessarily greater
than that in the near term.

However, there has been an unusual development in the
T-bill market as of late. A "hump" has emerged at the front of
the curve, causing it to slope downward instead of upward. That's
the blue line, which shows the shape of the curve on January
15.

Earlier this week, the "hump"
at the front of the curve suggested that traders were concerned
about the possibility of default on short-term debt, causing the
yields on bills maturing around 2/28/13 and 3/7/13 to rise above
those maturing 2/21/13.

The implication is that traders are no longer expressing elevated
concerns of a default around March 1, when the debt ceiling
battle was supposed to culminate before the Republican party
agreed to the latest deal.

The curve is still slightly inverted at the front today, but
that's mostly just noise, a bond trader tells us.

Nonetheless, the normalization to a more upward-sloping curve
suggests that things are back to normal, and traders aren't so
concerned anymore.